Kabbage vs OnDeck Capital – Which Offers The Best Business Financing
The traditional bank loan approval process is notoriously difficult and time consuming. When you’re running a business, who has time to deal with traditional banks? Kabbage and OnDeck Capital have upped the business financing game by making the business loan process faster and simpler. But which one is right for your business?
Why Not A Traditional Bank Business Loan?
A traditional bank loan is the route most small businesses go when they seek out financing. They soon find the going to be extremely tough.
Traditional banks aren’t really focused on making the loan process a pleasant experience for small businesses. They are more concerned that the business meets their minimal qualifications, which can take a while to confirm. From there, they dive in even more in an effort to remove as much risk as possible and make sure you’ll be able to pay back the loan. This disqualifies a large number of businesses.
Banks don’t have much motivation for providing small business loans. The main reason is that they don’t make much off of them. While companies like Kaggage and OnDeck make getting a loan easier, they are more expensive than traditional bank loans.
According to PremierBusinessLender, their average loan size for a small businesses is $50,000. Using other data, they also note that 80% of small businesses want loans that are less than $500,000.
When you’re talking about a traditional bank, underwriting $1 million or $100,000 cost the same. This demonstrates clearly why it is difficult to get a small business loan from a bank. Basically, the size of loans most small businesses are requesting are expensive for banks to process and profit margins are razor thin.
Also consider the recent increases in regulation that traditional banks are under. This only adds to their cost and time. All of these factors make small business loans a very poor return for banks.
Let’s look at a couple of alternative lending options – Kabbage and OnDeck Capital. These companies fall into the alternative lending category simply because they offer financing services that are not traditional bank loans.
What To Look For When Comparing Kabbage vs OnDeck Capital
Below are seven areas to to be aware of when going with an alternative lender.
Loan Amount: There will be differences in the minimum and maximum amount. If you are looking for a very small loan, make sure it is above the minimum the lender will loan out. For larger loans, check the maximum they’ll approve.
Loan Terms: Loan terms are the lengths available to lend. Having the ability to stretch your loan out will decrease the monthly payment but also increase the its overall cost, as interest piles up.
On the other hand, if you are able to pay back a loan in a short amount of time, this will reduce your cost. In that case, a shorter term loan is more beneficial.
Processing and Funding Time: Processing and funding times aren’t the same and mean different things. Processing time is the amount of time it takes to get approval for a loan. With most non traditional lenders, this can be within minutes.
Funding time comes after loan approval. This is the time from loan approval under the actual funds hit your bank account.
Interest Rates: Interest is what you pay periodically on loan principal for the term of the loan. Lenders will set an interest rate on the loan. This rate can have various types of structures. For example:
Fixed – During the loan term, the interest rate will remain fixed and not change.
Variable – A variable interest rate can take on many forms. It can start with a low teaser rate then at some later time, transition into a higher fixed term rate. Or it might start high and transition into a lower rate. Rates can also start off low and change depending on market conditions. There are many ways a lender can structure a variable rate. Be sure you fully understand all of them before applying.
Variable by Penalty – If you violate some condition in the loan, rather than paying a flat one-time penalty, it can cause your interest rate to increase for the term of the loan. Such a structure will have to be disclosed up front by the lender. Violations can include: Late payments, inability to meet a full payment, change in credit score, material change in your business.
Prepayment Penalty: A prepayment penalty can be assessed when the loan is paid back before its term date. In other words, if you pay the loan off early, the lender can assess a penalty. Lenders do this for lost interest that can’t be collected on the loan’s full term. Prepayment penalties are disclosed up front. Most alternative finances don’t have prepayment penalties.
Credit Score: Your personal score can and usually is taken into account. Some lenders require a higher score than others. There’s a correlation between credit score and APR (discussed below). The higher your credit score, the better APR you’ll usually get.
APR: APR is the full loan cost and paints a better picture of cost than only interest rate. One lender might have a lower interest rate and that can be enticing. But then their APR is higher. Meaning, you will pay more than a lender with a higher interest rate but lower APR.
Kabbage Review – The Good
Kabbage actually uses what’s called a line of credit. This is similar to a HLOC (home equity line of credit) for personal lending.
Kabbage is great for business owners who need cash fast and don’t have the best credit.
Kabbage is able to process loans quick because they use approval methods that are much different from that of traditional banks. Their entire approval process is also paperless. Loan decisions are handed out fast. In fact, within just 10 minutes.
By connecting to a business checking account and with an online bookkeeping service such as Quickbooks or with a payment processor such as PayPal, Kabbage is able to get most of the information it needs.
Even if your credit isn’t good, it probably won’t be a factor in determining your eligibility. In fact, some approved Kabbage clients have personal credit scores as low as 500.
If your financing needs are small, say under $100,000, Kabbage can help. They finance up to $150,000.
Because Kabbage establishes a line of credit for your business, funds are always available. If you have funds remaining in your line, you decide when you want to use them. You don’t have to worry about reapplying.
Loan terms are 6 to 12 months. There is a difference in the rate and the amount you’ll pay depending on which term you choose.
For the 6 month loan, you’ll pay 1/6 of the loan every month. In addition, there is a fee to pay each month. The fee depends on a number of business factors. Once you apply, you’ll know what you fee is.
If the fee is 4%, you’ll pay $400 each month on top of the 1/6 principal for the first two months. Then you’ll pay a fee of $100 on top of the principal for the remaining 4 months.
For the 6 month term, your fee is highest for the first 6 months then drops for the last 6.
The fee rate ranges between 1.5% and 10%.
Kabbage Review – The Bad
Any Kabbage review isn’t doing its readers justice if it only provides one side of the story. Now that we know the positives of using Kabbage, what are some of the negatives?
For one, there’s the high APR you’ll receive. APRs range from 24% to 99%. This is basically the same as financing with a credit card. For this reason, Kabbage isn’t a good fit for a longer term or large loans. If you need to fill a cash flow short fall, Kabbage can be a good option, assuming you have a thorough plan for paying off the loan on time.
While you can pay your Kabbage line of credit off early, since there isn’t a prepayment penalty, doing so won’t have much benefit. The reason goes back to how Kabbage has structured its monthly fee.
Because you pay the most on the fee during the first few months, you’re still paying the majority of loan cost even if you pay off the credit line early.
Kabbage Vs OnDeck Capital
OnDeck has a lower APR than Kabbage. Lower APRs usually mean more difficulty in qualifying. That is the case with OnDeck.
Like Kabbage, OnDeck also requires at least one year in business. But their annual revenue requirement of $100,000 is twice the amount of Kabbage.
For a line of credit, a personal credit score of 500 and above are needed. Whereas many Kabbage customers have credit scores of 500, OnDeck line of credit customers usually have a score of 660.
You also can’t have any personal bankruptcies in the last two years.
The approval process is about the same as Kabbage – 10 minutes. Upon approval, your funds should be available in 24 hours to within a few days.
APRs for lines of credit are between 14% and 40% with an average of 34.1%. Payments are made weekly for six months. There aren’t any prepayment penalties.
OnDeck does charge a $20 monthly maintenance fee on its lines of credit, which Kabbage does not do. However, you can easily avoid the $20 fee but taking an initial draw of $5000 on your line within 5 days of opening the account.
Lines of credit are great when you need working capital and can pay it back within six months. But for large purchases, a term loan is usually a better option.
OnDeck does offers term loans, which are different from lines of credit. Term loans are similar to what you’d get with a traditional bank.
A term loan through OnDeck has an APR that can range from 9% to 99%. These loans also have an origination fee of 2.5 – 4%. The origination fee will decrease on the second loan to 1.5% and for the third loan it’s 0%.
There’s also no prepayment penalty on term loans. OnDeck offers a prepayment option that can reduce your interest rate.
While lines of credit are great for working capital and cash flow shortages, a term loan can be used for the same reason. As mentioned earlier though, they are a better fit for larger expenditures such as company growth projects and equipment purchases. The reason behind this are the longer terms, which go out to 36 months.
OnDeck also has experienced experts who you can speak with by phone at anytime during the process. OnDeck is known for the great customer service. This is proven through their TrustPilot score of 9.5/10.
Which One Is Right For Your Business?
To answer this question, we’ll go over some of the main points based on the need.
Small businesses that don’t require large loans are better suited for Kabbage.
Businesses needing larger loans, earning more than $100,000 per year and have been in business at least a year, are better suited for OnDeck.
Both require at least a 500 personal credit score, which means personal credit score shouldn’t be a factor when going choosing a line of credit between OnDeck or Kabbage.
Both have great customer service available by phone, which means customer service shouldn’t be a factor in your decision either.
OnDeck places a UCC lien for all loans. But Kabbage only does this for loans over $20k. Because most businesses will likely borrow more than $20k, this might not be a factor.
A UCC lien is a personal guarantee. This means if the business is unable to pay its loan, the company can come after your personal assets.
Both companies offer mobile apps, which lets you access their services on the go.
In summary, businesses with less than $100,000 in earnings per year requiring a loan of less than $150,000 are a good fit for Kabbage. Large businesses earning and needing more financing are better for OnDeck Capital.